One of my favorite books is “The Power of Habit”, by Charles Duhigg. Do you want to make your life easier by practicing good habits, and therefore have extra expendable energy for new pursuits? Practice the power of savings.
The Power of Savings
When you get up in the morning, bleary-eyed and stumbling towards the bathroom, somehow managing to wash your face, brush your teeth, and shower for the day, how much of that is actual effort? I’d argue almost none if you’ve done it for so long. Your brain is on autopilot and you’ve trained it to overcome the fatigue by doing it over and over.
40 percent of the decisions you make in a day are on autopilot. That coffee you buy every day that will cost you 500k over the course of your lifetime? You decided to buy it one day, telling yourself that it’s not bad, and slowly you begin walking by Starbucks and getting it every day out of habit. What if you started taking the subway instead of biking to work or walking? The order of your morning routine? That’s all your brain on autopilot.
Those are all habits, because once upon a time you decided it was easier to spend $4 for coffee instead of making it at home. That everyone else commuted via public transportation so you should too. That the small savings you get from finding a coupon for something are probably not worth your time because it’s too much mental exertion. But if you start thinking about the power of savings, you’ll soon find yourself seeing that it’s easy once you know how. If you have a tiny voice in the back of your head saying, “Just save this once.”, soon that tiny voice will pop up with everything that is a monetary decision, and your brain will be on autopilot when it comes to money. You’ll start seeing ways to save that you’ve never even thought of.
Here are the things I think about when deciding to buy it or not, and easy ways to save on the purchase. If you keep saving and investing, you can quickly retire in less than 10 years.
Save by deciding whether or not to buy it
Here are a few questions you should ask yourself the next time you’re buying something. Learn some more tips from when I decided to cut down my clothing consumption.
How many hours did you have to work to buy this?
If your hourly wage is $20 and that jacket costs $100, then it’ll take you 5 hours of work to pay for it. Is it worth it?
What is the cost per use of the item?
How many times are you realistically going to wear that jacket over the course of its lifetime? Estimate how many times you’d wear it a month, and then extrapolate to how long the item will last. If you wear it 10 times a month and think it’ll wear itself out in 2 years, then it’ll cost you 40 cents per wear, pretty reasonable (240 wears/$100).
What is the average cost per wear in your closet? This year I noticed I wasn’t even wearing 90% of the items in my closet. I wear the same things over and over. I haven’t bought clothing, shoes, or accessories in 8 months.
What is the maintenance cost of the item?
For people who wear business causal (or even formal) clothing to work, how much would you save if you didn’t have to dry clean your clothes? I never did dry cleaning, but a lot of friends spent $100-$300 a month on dry cleaning. If the item you’re buying is going to cost you $X/month in terms of maintenance, can you buy another item that needs less maintenance in terms of dollars?
What will it cost you in the future?
If you know approximately how many years it will take you to be FI, you can take the return multiple and see how many of the current item you could have, if you just waited until retirement.
For example: If you think you’ll reach early retirement in 15 years, you could have 3x as many of the current item as if you had bought it in the future as opposed to now. Here I used an 8% return on investment. If you’re planning on retiring at a normal age? You could buy 29x of that item. Isn’t compound interest just amazing?
Now, these questions might be difficult to answer the first time you try to buy something, but over time it’ll get really simple. When I go shopping, I can calculate the cost per wear, cost of item in the future, and hours of work for me to buy the item, all in a few seconds in my head. At first it was hard, but once your brain does it for every single product I look at, you don’t even realize it’s doing the calculation — it’s now on autopilot. The magic of the power of savings.
Save on the cost of the purchase
Cash Back online
Cashbackaholic tells you which website will give you the most cash back. Ebates is included in this, but doesn’t always give you the most money. Cashbackaholic checks for the best ebates basically.
Miles/Points via Credit Cards
Cashbackaholic will tell you how many miles airline portals will give you as well. These are mutually exclusive though, you can’t get miles AND cashback. You need to pick one. Check how much an airline will give you for buying an item through their portal. Let’s say United gives 2 miles/$ for a website. Is it better than 2% cashback on ebates? I value United miles at LEAST at 1.5 cents per mile. TPG publishes an update on his view of the value of points, and I’m not hardcore enough to create my own, so I generally take his values if it’s an airline I’m not familiar with. So yes, the United points are a better deal. This paragraph probably deserves a whole other series of blog posts on travel hacking (not yet written).
Additionally, there are times when airline portals will offer you a lot of miles (1,500 to United comes to mind) to make a few purchases in a time span. So calculate if it’s worth it to buy it through the portal for those bonus miles.
Why is it so important to travel hack? Because it allows you to do things like go to Japan for $5.6 on business class. Yes, less than $5!
There are a ton of airline dining programs, where you enter in your CC details, and every time you spend money at an approved dining place, you get miles. You can only link one CC to one dining program, so you can’t double dip. It’s a happy surprise when I get points, because I tend to just link my CC and not look at the restaurants. I don’t want to be biased to go to a points restaurant. If you want to dine on fancy free food, join Yelp Elite.
I google the name of the website and “coupons” or “promos”. Retailmenot generally has the best discounts I use, but occasionally I will find another site via google that offers a better deal.
Gift Card Stacking
I check GiftCardGranny and Raise for gift cards that are usually 5%+ off. When I needed a bunch of stuff at Home Depot, I asked a contractor friend (who gets 10% off large purchases) to buy something for me with a stack of gift cards (all 5% off at least). Hey, that 14% discount adds up when you’re purchasing large amounts!
Now, this might be hard to implement all at once, but you should try to incorporate one item at a time before doing all of them is automatic. I’d say I get about a 10% savings rate on doing all these things, so for someone that spends $5,000 a year on stuff, it saves you $500.
This post was meant to be a summary of the best parts of “The Power of Habit”, but turned into something else. Has this ever happened to you when writing a blog post? Are you going to try and use the above to save money on purchases? Do you already do these things?
Let me know in the comments down below what you think of the power of savings :)!
Olivia worked in finance and wants you to learn the secrets of financial independence. She’s on track to reach financial independence before 30, and she wants to teach you how you can retire in less than a decade as well.
She thinks everyone needs an emergency savings fund and uses CIT Bank . They have the highest yielding rate at 1.55% and only require a minimum of $100. No monthly fees or charges like other big banks!
Her favorite free investment plan is from Ellevest. Go to Ellvest and click “Get Started” to get yours.
Her favorite personal finance tool is Personal Capital, which allows her to track her spending, historical net worth, and monitor her credit cards. It’s an upgraded version of Mint, in her opinon.
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